When A-shares Plunge, the Nikkei Index Soars Back to Its Peak: What Major Changes Have Occurred in Japan’s Economy?

Salaries and prices have been “frozen” at the same time. Compared to the generally optimistic atmosphere in the 1980s, Japan’s influence today is nowhere near what it was back then. Over the past year, while the world has been struggling to cope with inflation, Japan has still not fully emerged from its deflationary struggle. It remains the only country with a negative interest rate. The domestic situation in Japan also seems less than ideal. In the 1980s, Japan was exporting a vast number of cars and electronics, and its pop culture dominated the globe, bringing a sense of pride that now seems to have disappeared. According to a 2022 survey by the Japan Foundation, which asked 17-19-year-olds from China, India, the UK, the US, South Korea, and Japan, the proportion of Japanese youth who believe the country will improve is the lowest to date. Since the 1990s, Japan’s inflation rate has remained close to 0%. Many Japanese consumers still believe that the price tag of a product today should be the same as yesterday’s, and tomorrow’s should be the same as today’s. This “no price hike” mentality is deeply ingrained in people’s minds. Not only do Japanese consumers dislike price increases, but Japanese businesses have also undergone significant changes. If prices go up, consumers will simply switch to other stores or brands.

Therefore, even when the prices of raw materials rise, companies are reluctant to increase the prices of their products. This has resulted in a “price freeze” practice by companies. Alongside the freeze on goods and service prices, Japan’s wages have also stagnated. This is not a coincidence. For consumers, if wages freeze while prices rise, daily life becomes unsustainable. For businesses, if wages rise while product prices remain the same, operations would be unsustainable. Therefore, a freeze on both prices and wages is seen as a “balanced compromise.” In reality, consumers want higher wages, businesses want to increase product prices, but if neither side can get what it wants, maintaining the status quo is seen as an ideal state. This is why Japan’s wage and price freeze has continued until now. Different countries have different paradigms. Japanese society sees the freeze of prices and wages as natural, but this would not work in the US. In 2016, when Japan’s Seino Dairy raised the price of its traditional ice cream brand “Gokozu-kun” for children, a TV ad showed the CEO apologizing to customers.

This video went viral, receiving over 2 million views online and was very well received by consumers. It was said that the ice cream brand’s sales did not drop noticeably after the price hike due to this incident. However, this sequence of events was interpreted entirely differently in the US. At the time, The New York Times ran a full-page article on this apology. The price increase due to rising raw material costs was seen as an absurd distortion of Japanese society. In the US, it is natural to pass on the increased cost of raw materials to product prices. If not, managers would be held accountable. Failed paradigm reforms: In 2013, under Prime Minister Shinzo Abe, the Governor of the Bank of Japan, Haruhiko Kuroda, introduced the groundbreaking quantitative easing policy (known in Japan as “Abenomics”), attempting to escape chronic deflation. In other words, the Bank of Japan sent a strong signal that it would continue to increase the money supply not only now but also in the future. The historic monetary easing policy did, as intended, lead to a significant depreciation of the yen, but when this policy resulted in price increases, the Japanese people began to complain because while prices went up, wages did not. Then Chief Cabinet Secretary Yoshihide Suga, considering public outcry, made a speech emphasizing that continued yen depreciation did not align with Japan’s economic interests, and soon after, the Bank of Japan made the same statement. In June 2015, the yen stopped depreciating and began to appreciate once again.

Looking back now, in the context of Japan’s price and wage paradigm, the longstanding norm of stable prices has been broken by the groundbreaking monetary easing policies, while the wage stagnation paradigm has remained stubbornly persistent. As mentioned earlier, consumers can tolerate wage freezes under conditions of stable prices, and businesses can endure price freezes while keeping wages unchanged. Japan’s price and wage system is built on this delicate equilibrium. However, if the price freeze collapses while wages remain frozen, it would undoubtedly face strong resistance from consumers, resulting in the failure of this paradigm shift.The lack of dynamism in Japan is evident, with wages remaining stagnant for an extended period, and this can lead to two possibilities: one is that wages for some individuals rise while others see a decrease, keeping the average wage unchanged; the other possibility is that everyone’s wages remain the same, causing the average wage to stagnate. The first scenario represents a healthy wage system where high performers and successful companies see wage increases, while underperformers see stagnant or reduced wages, creating a strong incentive for productivity. The second scenario represents a static wage system where wages stay the same regardless of performance, eliminating any incentive for workers, leading to a decline in social dynamism.

So, which of these situations applies to Japan? The Japanese Ministry of Health, Labour and Welfare surveys the wage adjustment practices of companies every year. Between 1975 and the mid-1990s, the percentage of companies that did not adjust wages was minimal, accounting for only 2%-3%. This meant that it was expected for companies to raise wages or offer regular pay increases. However, from the late 1990s, the proportion of companies that did not adjust wages began to rise, and by around 2005, this proportion reached 25%, lingering at high levels until 2010. After 2013, under the influence of “Abenomics,” this data began to decline significantly, though it rebounded again post-2020. However, Japan’s wage adjustments remain quite limited, and if we analyze the data carefully, we see that even though more companies began adjusting wages after 2013, the actual wage adjustment was modest, with the average wage increase rate being only around 2%.In 2021, when global inflation reached Japan, Japan’s price-wage system once again began to show cracks, leading to a new phase. First, consumer expectations of inflation increased, and their psychological resistance to price hikes began to diminish. This also marked a shift in the long-standing price-freeze norm of Japanese companies. Every month, the Japanese Cabinet Office conducts a “Consumer Trends Survey” across approximately 8,400 households, which includes a question about inflation expectations for the next year. The survey results showed an increase in inflation expectations starting from the fall of 2020, with a 4% rise in expectations so far.

During the same period, actual inflation increased by 3.5%, showing that inflation expectations rose faster than the actual inflation rate. This phenomenon is likely because many people expected that the actual inflation rate would continue to rise after observing the inflation trends. In fact, this tendency has been common in past data, but this time the inflation expectations have exceeded the actual inflation rate, which is unprecedented in Japan.Why has inflation expectation risen so rapidly? There are several factors to consider. One reason is that the price hikes have been concentrated in energy-related products, such as gasoline, and food items, which are essential for consumers’ daily lives and frequently interact with price tags. Another factor is the impact of high inflation in Western countries, particularly in Europe and the US. Japanese media extensively reported on the severe inflation occurring in the US and Europe, triggered by the pandemic and the Russia-Ukraine conflict, which also affected Japan. As a result, many Japanese people began to imagine that Japan would experience inflation similar to what occurred in the West. Some even believed that Japan had ended its long period of deflation and entered the era of inflation, though this is not entirely accurate. It should be noted that Japan’s inflation rate remains lower than that of major developed countries and has yet to reach the Bank of Japan’s 2% target.

The current problem for Japan is that while the price level has risen, wages have not followed suit, leading to a decline in the actual purchasing power of residents. During the spring labor negotiations of 2023, Japan’s large companies raised wages significantly, with the average wage increase rate reaching 3.99%, 1.72 percentage points higher than in 2022, and the average wage increasing by 5,800 yen, reaching 13,362 yen, a 30-year high. However, this has not changed consumers’ pessimistic views on wage prospects, with 60% of consumers expecting no wage increase, while over 50% of consumers in Europe and the US expect their wages to rise. In fact, as of November 2023, Japan’s real wages (adjusted for inflation) have decreased year-on-year for the 20th consecutive month, with inflationary pressures continuing to outweigh the effects of wage growth. In response to this situation, attention has turned to whether the Bank of Japan will adjust its ultra-loose monetary policy. Some economists predict that the Bank of Japan may raise its short-term interest rates from -0.1% to 0% in 2024, ending its negative interest rate policy. However, this will depend on changes in commodity prices, wage levels, and the Bank of Japan’s inflation outlook.